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2011 U.S. Manufacturing Outlook

Prospects somewhat brighter for select segments of the U.S. industrial supply chain.

Much has been said and reported about the weakened state of manufacturing in the U.S., in both mainstream and trade journals. Oftentimes, commentary is usually accompanied by adjectives such as “bleak, dismal, crippled,” etc. While there is no question that this particular sector of the U.S. economy has taken some body blows over the years—not just in the most recent economic downturn—many industry observers believe there’s enough left worth saving. We just need to act fast.

Manufacturing industry consultant Michelle Nash-Hoff has some ideas. For one, she believes the U.S. government must create a national tax climate that allows U. S. manufacturers to be competitive in the global marketplace.1 “We must reduce the corporate tax rate and promote fair rules for taxation of active foreign income,” she writes. “We must institute permanent lower tax rates for individuals and small businesses, because most small businesses are not incorporated and create the majority of new jobs in the United States.”   

One danger Nash-Hoff sees is the continuing expansion of federal mandates and labor regulations that undermine employer flexibility and increases costs. All of this, she notes, discourages hiring new employees. What she supports is the implementation of a common-sense, fair approach to legal reform, which is vital to bringing legal costs under control and eliminating the disadvantage American companies face in competing globally.

“We definitely need to create a regulatory environment that promotes economic growth,” Nash-Hoff stated, citing a Small Business Administration estimate that shows regulatory compliance expenditures amount to $1.1 trillion annually. “U. S. manufacturers are forced to comply with scores of regulations that manufacturers don’t have to face in other countries.”

Nash-Hoff’s view is partially in line with the philosophy espoused by the National Association of Manufacturers (NAM). The 1,300-member strong organization—whose constituents comprise both domestic firms and international companies—embraces three core approaches: tax policies to bring American more closely into alignment with major manufacturing competitors; government investments in infrastructure and innovation; and trade initiatives to reduce barriers and open markets to U. S. exports.

“I share NAM’s goal to have the U. S. be a great place to manufacture to meet the needs of the American market and export our products to the world,” Nash-Hoff stated. At the same time, she has a wish list of her own, namely modernizing what she calls the country’s outdated export control system. In addition, she notes, small-to-medium-sized manufacturers need more assistance in export promotion and export credit.  

But the biggest problem, according to Nash-Hoff, is that the United States is no longer the source for products consumers buy around the world (electronics, small appliances, clothing, etc). These products are now being made in China and other Asian countries, and imported into the United States and other developed countries.  And as outsourcing goes, so goes research and development, she argues.

2011 ECONOMIC OUTLOOK: A “MIXED BAG”

While the end of 2010 didn’t signal an a complete turnaround in the U.S. economy, industry observers were nonetheless encouraged by third- and fourth-quarter surges in key economic indicators—i.e., PMI Index, new car sales, industrial production, etc. Some economists expect the rebounding to continue, although not at the same pace for all sectors.

“For manufacturers, much will depend on what sector they serve,” said Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International (FMA).2 “For example, housing and commercial construction will remain weak, and many states are in a severe budget crisis. However, the fact that oil prices are rising and that economic growth is solid in the states that are engaged in the energy field make for good news to manufacturers that sell to the energy community.”

Kuehl offers 10 predictions for 2011 that will impact both manufacturing and other sectors:

  • The Federal Reserve will keep interest rates where they are for most, if not all, of 2011. That means other rates will not likely rise much, either.
  • The Fed will keep rates low because there will be little or no inflation to speak of –at least from the core rate perspective (real rates of inflation may be another story).
  • The unemployment rate will remain high–between 9% and 10.3%. It may actually worsen early in the year before getting a tiny bit better later.
  • Export levels will continue to increase as the dollar will remain weak. The dollar may gain a little against the euro simply due to the crisis in the Eurozone.
  • The price of most industrial commodities, such as steel, copper, aluminum, nickel and zinc, will rise, but only according to supply and demand. Unless there is some burst in economic growth, there will be nothing sudden.
  • The overall level of consumer sentiment will improve, but not fast and not consistently–unless and until the jobless rate improves.
  • Oil prices will rise to around $100 early in 2011 and will likely live in a range between $90 and $115.
  • The gap between the various states regarding their budget deficits will widen considerably – with those in the industrial Midwest taking the biggest hit (along with California). The states in the Southeast, Southwest, Rocky Mountain Region and the Great Plains will benefit the most.
  • The housing market will finally stabilize, yet at low levels, and there will be very limited growth in residential and commercial building.
  • The U.S. economy as a whole will start to grow at between 2.6% and 3.2%–not great but well out of recession territory. Finally, there will be no double dip in 2011.

“There are some parts of this forecast that will have an impact on the rest of it and growth is at the top of that list,” Kuehl noted. “The assumption that interest and inflation rates will stay low means that there is moderate and controlled growth. This also is a factor as far as the likelihood of a double dip. If the U.S. economy should suddenly start to surge and grow at a rate of 5% or 6% a quarter the whole system shudders to keep up.”

Kuehl predicts there could be “bottlenecks” across the board in many categories, as most companies have been reducing capacity in order to accommodate the recession. If they have to gear up fast, he notes, there will be price hikes and even labor shortages that will add to the inflation threat. According to Kuehl, the inflation trigger will provoke the Fed to raise rates to counter the impact of the inflation surge, which will mean that the dollar will gain strength as the value rises.

At the end of the day, Kuehl predicts there will be a period of modest growth and controlled expansion, but also one of narrow margins and lots of business and personal vulnerability.

REFERENCES

  1. “Will NAM’s Manufacturing Strategy Plan Save American Manufacturing?” Michelle Nash-Hoff, December 2010. 
  2. Dr. Chris Kuehl is economic analyst for the Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence. He is the author of Fabrinomics™, a biweekly economic analysis e-newsletter for members of the FMA. 

 

 

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